CDS Financial Considerations in Divorce 3 — Questions and Answers
Question 1: A spouse transfers the marital home to the other spouse as part of a divorce settlement. Under IRC Section 1041, this transfer is:
- A taxable sale at fair market value
- A gift subject to gift tax
- A non-recognition event with no gain or loss recognized (Correct answer)
- Subject to capital gains tax based on original cost basis
Correct answer: A non-recognition event with no gain or loss recognized
IRC Section 1041 treats transfers between spouses (or former spouses incident to divorce) as non-recognition events, deferring any gain.
Question 2: When calculating child support under income shares models, 'gross income' typically includes all of the following EXCEPT:
- Rental income from an investment property
- Tips and commissions
- Income voluntarily reduced to lower support obligations
- Welfare and TANF payments (Correct answer)
Correct answer: Welfare and TANF payments
Public assistance payments such as TANF and welfare benefits are generally excluded from gross income in child support calculations.
Question 3: A divorcing couple has a joint credit card debt of $20,000. If the divorce decree assigns the debt to Spouse A but Spouse A defaults, the creditor can:
- Only pursue Spouse A because the decree reassigned the debt
- Pursue either spouse since the creditor was not a party to the divorce decree (Correct answer)
- Pursue Spouse B only if Spouse A is insolvent
- Forgive the debt automatically due to the divorce
Correct answer: Pursue either spouse since the creditor was not a party to the divorce decree
Creditors are not bound by divorce decrees; joint debt remains collectible from both parties regardless of which spouse was assigned responsibility.
Question 4: When a spouse receives a 529 college savings account in a divorce settlement, what is the primary financial planning concern?
- The account cannot be transferred between spouses
- Non-qualified withdrawals trigger income tax and a 10% penalty on earnings (Correct answer)
- Contributions cannot be changed after divorce
- The beneficiary designation cannot be changed
Correct answer: Non-qualified withdrawals trigger income tax and a 10% penalty on earnings
If 529 funds are used for non-educational purposes, the earnings portion is subject to ordinary income tax plus a 10% federal penalty.
Question 5: In divorce financial planning, 'income imputation' refers to:
- Attributing income to a spouse based on what they could earn if fully employed (Correct answer)
- Dividing investment income equally between spouses
- Calculating the present value of future income streams
- Excluding passive income from support calculations
Correct answer: Attributing income to a spouse based on what they could earn if fully employed
Courts impute income to a voluntarily underemployed or unemployed spouse based on their education, work history, and prevailing wages.
Question 6: Which divorce financial strategy involves one spouse keeping the house while the other receives a greater share of liquid assets of equal value?
- Deferred sale agreement
- Asset offset or buyout (Correct answer)
- Tenancy in common arrangement
- Forced partition sale
Correct answer: Asset offset or buyout
An asset offset or buyout trades illiquid real estate equity for liquid assets like cash or retirement accounts of equivalent value.
Question 7: A Certified Divorce Specialist discovers a spouse's financial disclosure omits a recently opened offshore bank account. The recommended immediate action is to:
- File a motion to dismiss the case
- Advise the client to accept the settlement quickly before discovery
- Request formal discovery including subpoenas and forensic accounting (Correct answer)
- Report the finding only to the court, not the client
Correct answer: Request formal discovery including subpoenas and forensic accounting
Undisclosed assets require formal discovery tools such as subpoenas, depositions, and forensic accounting to fully expose hidden wealth.
CDS Financial Considerations in Divorce 3
A spouse transfers the marital home to the other spouse as part of a divorce settlement.
Under IRC Section 1041, this transfer is: